Disrupt or be disrupted: the CFO perspectiveMarch 20, 2013
A “brand new order” of continuous, accelerating change and spiraling complexity within the consumer products industry is disrupting the business landscape and creating huge opportunities and risks for the CFO to manage.
In this changed environment, CFOs at consumer products companies have to get to grips with five key challenges:
- Uncompromising stakeholders present companies with dilemmas
- Consumers take hold of the conversation and demand greater value
- The new age of the consumer demands a revitalized approach to brand management
- Unprecedented complexity demands greater flexibility of supply
- The fast-changing environment requires a new style of leadership.
Implications for CFOs
Winning in the brand new order requires companies to make far-reaching changes to their business. Many of these changes fall within the remit of CFOs, or at least have some link to their roles and responsibilities. Companies need to:
Reframe strategic choices
The scale and pace of change creates what appear to be paradoxes for decision-makers. Companies must invest to maintain market share in sluggish mature markets, but also allocate funds and resources to capture growth in rapid-growth economies.
They must get closer to consumers in specific markets, but also figure out how to derive economies of scale at a regional or global level. They must also determine a long-term vision for the company and be able to react quickly to sudden changes in the business environment. For CFOs, resolving these paradoxes lies at the heart of strategic decision-making.
Deciding how and where to compete, and where to focus in order to create value, is increasingly difficult. A key decision for CFOs, which is explored in the Ernst & Young report A tale of two markets, involves the timing and extent to which they should reallocate assets and resources away from developed markets to rapid-growth ones. Finance leaders play a key role in determining:
- The right mode of entry
- The nature of the investment
- How quickly to scale it up in the context of other parts of the portfolio
At the same time, CFOs must be aware that developed markets still have profitable potential, despite their problems, and ensure that the right assets and resources remain in place to maintain or grow share in these more established markets. Managing this portfolio of assets globally requires CFOs to make decisions over where to centralize and where to globalize. Companies must strike a careful balance between the need for local dynamism and global scale.
CFOs must also be able to communicate these plans to investors and other stakeholders. Building and maintaining trust at a time of great change requires complete transparency. Finance leaders must be clear about the risks and opportunities facing the business, and be consistent in how they report them.
Realign the value chain
As companies expand their geographical footprint and manage a proliferation of channels, they inevitably face a dramatic increase in complexity. This requires a robust and resilient value chain. The increasing cost and scarcity of natural resources adds to the challenge, placing an even tighter squeeze on margins and stretching many operating models to breaking point.
These pressures, along with broader globalization and technology trends, require companies to reassess the balance between centralization and localization in the supply chain. CFOs can analyze the merits of each approach. Rising costs across the supply chain can erode the benefits of manufacturing in a low-cost jurisdiction.
One alternative is a shift to a regional supply chain model, which can help to offset rising shipping costs while still maintaining proximity to local markets. There may also be tax advantages with this approach, because there is less need for components or commodities to cross borders.
In addition to dealing with a complex bricks-and-mortar retail infrastructure, companies must also manage other fast-growing channels, including e-commerce. CFOs need to assess the value that each of these channels brings and ensure that the company has a multi-channel strategy that meets performance metrics and goals.
Social media channels increasingly provide a way for consumers to express their approval, or disapproval, of brands. This trend enables companies to leverage engaged consumers as brand ambassadors, but it can also pose risks.
From the CFO’s perspective, awareness of these opportunities and risks is crucial. In addition, finance leaders must start to develop ways of measuring the performance of social media and determining the return on investment from this growing portion of the marketing budget.
Ruthlessly execute to capture value
The difference between success and failure often comes down to how a company implements its strategic vision. Companies need an operating model that supports agility, a ruthless approach to costs and a strong focus on continuous improvement. They also need a highly rigorous focus on talent, which is by far the most critical barrier to execution.
CFOs must lead from the top in ensuring that these assets and capabilities are in place, and that the company has the right resources in the right places to support the strategic vision. This includes resources in the finance function, which are themselves evolving rapidly against a backdrop of increased change and complexity.
The rapid pace of change requires local managers, who may be thousands of miles away from corporate headquarters, to make decisions every day. Ensuring that these are appropriate and aligned with strategic objectives requires CFOs and risk teams to put in place robust controls frameworks that place decision-making within agreed parameters. Performance management tools are also essential to measure progress toward strategic goals and identify problems with execution.
Over the past few years, CFOs have become accustomed to seeking out cost-efficiencies and containing costs. Strong pressure to continue with this work remains, particularly against a backdrop of structural cost increases.
CFOs should work to implement a broader culture of continuous improvement, so that there is a permanent focus on driving out waste and cost from the business. At the same time, they must take care to prevent taking out costs that consumers value.
Yet cost containment should not be the primary focus. CFOs and other members of the management team also need to explore ways of improving pricing power to create more sustainable long-term value.
Questions or comments? Contact T Magazine and Ernst & Young